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FireEye Deal Reflects Broader Market Trends and Value Drivers

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Earlier this month FireEye, the provider of software-based malware protection systems that went public only last September , announced its acquisition of Mandiant, a provider of threat detection and response solutions, which rose to prominence after linking certain cyber-attacks to a unit of the People’s Liberation Army in February 2013.  Leveraging its well-performing stock as currency for the majority of the purchase price, FireEye paid $1.05 billion for Mandiant, an approximate 10.0x multiple of 2012 revenue.  Investors cheered the announcement, FireEye’s stock jumped 39% to $57.02 in its next trading session and has continued to rise.  So what motivated such a rich acquisition multiples?  The answer underscores a broader trend in the cybersecurity market.

Recent high-profile cybersecurity breaches on major companies such as Snapchat, Target, and Neiman Marcus have highlighted the growing frequency and complexity of cyber-attacks.  As a result, the cost of intrusions into data and software systems are growing substantially, reaching billions of dollars in many cases.  For example, the most recent breach on Target’s card processing systems cost an estimated $3.6 billion in stolen data.  As the complexity, frequency, and costs of attacks continue to increase, the demand for detection, prevention, and mitigation solutions is growing significantly, not only within the commercial sector, but within the Federal market as well.  Cybersecurity remains a growing priority for Federal departments and agencies.  The President’s FY14 budget appropriates $810 million for the Department of Homeland Security (“DHS”) to protect Federal systems from attacks, strengthen state and local government protection systems, and support private sector initiatives. Additionally, the President’s FY14 budget appropriates substantial funds for cybersecurity initiatives within both the Department of Defense (“DoD”) and the Intelligence Community (“IC”). As a result, companies like FireEye are attempting to augment their businesses with the most advanced, adaptable, and quick-reaction security solutions in order to serve customers within high-growth, well-funded markets.

Mandiant was a very unique asset possessing a number of value drives to include leadership in a growing market; differentiation that allows it to compete on capability and technology vs. price; IP in the form of proprietary software, and; while a diverse client base, a very scalable and broadly applicable solution.  FireEye’s stock jump of nearly 40% after announcing a 10x revenue acquisition demonstrates investor confidence in the combined companies’ insight into the cybersecurity market; shareholders recognize that industry leaders must possess a complete portfolio of solutions, including both threat detection and threat response, in order to meet customer demands.

Combined with a robust valuation environment, strong demand for prevention and mitigation solutions will support persistent cybersecurity M&A activity in 2014. For those operating in the cyber marketplace, the FireEye deal provides critical insight: aspiring industry leaders must prepare to make bold, committed investments in order to fully capitalize on this highly-lucrative market.        

Source: Capital IQ; Office of Management and Budget